Prior to that time, the federal government ran on consumption-based taxes. For the first 125 years of our nation's existence, we did just fine without income taxes.
We can do it again. In fact, we really need to.
There is now a bill before Congress, the Fair Tax Act, that would wipe out all taxes on income and replace them with taxes on retail spending. If we could only change one thing about how our federal government works, this should be it. The impact on our national wealth and productivity will be enormous.
The worst thing about federal income taxes is that they are invisible to too many people. In fact, if you are reading this chances are good you think you don't pay any income taxes. That is the biggest part of the problem. If you don't think you pay any income taxes, the truth is you are getting killed by income taxes. Low wage workers who file tax returns and receive large Earned Income Tax Credit checks are actually getting hammered by the current system and would benefit tremendously by the Fair Tax. That's because every time you spend $100 for any good or service, approximately $30 of that is going to pay the income taxes of the providers of those goods and services. You get to pay corporate taxes without any of the benefits of owning a corporation.
If you have a hard time with your current tax burden, how about adding 30 percent? No need to change anything, you are already paying it. This tax, embedded in the cost of everything you spend money on, isn't seen or even thought about. Payroll taxes work the same way. They hit hardest those least able to afford them.
The Fair Tax would repeal all federal income taxes. Will you be writing a check on April 15? Not if we pass the Fair Tax. And payroll taxes would be gone. The money you earn from your employer would be the same as your take-home pay. And here's the kicker: those 30 percent embedded income taxes you pay every time you pull out your wallet would be gone. Corporate income taxes are what really get you. If we change the law so they don't have to pay them, that means you don't have to pay them.
This kind of puts the effort to raise the tax on "evil" oil companies in a different light, doesn't it? The joke would be on you. You see, corporations don't pay income taxes. They collect them from us and pass them along.
So, under the Fair Tax, you get to take home every penny you earn and you don't have to cough up any business pass-along income taxes either. Even better, every household would get a check from the federal government every month based on family size. This pre-bate check for a family of 4 would be around $500. That would help wouldn't it?
We all like to get benefits - and we all get a thrill when we find something for nothing - but you might be wondering how Americans would fund the federal government if we stopped sending them all this money. The answer is simple: under the Fair Tax, every retail purchase of new goods and services would include a 23 percent tax at the cash register. To re-cap: everyone's income goes up immediately because we get to keep our gross salary and prices basically stay the same because the embedded 30 percent is replaced by the 23 percent Fair Tax. The pre-bate is designed to keep poor people off the tax rolls. Remember, even Earned Income Tax Credit recipients and poor senior citizens have to pay embedded taxes now.
Obviously, there is a lot more to this. But that is it in a nutshell. Government has, in too many ways, ceased to work for the people. It is all about people with powerful connections taking care of their friends. The Fair Tax would take a lot of the annual tax tinkering and politics out the equation. More on this later ...